Originally from World Arbitration and Mediation Review

The Increasing Infallibility of NAFTA Chapter 11 Awards: A
Contextual Look at the Feldman Judicial Review
By
Rajeev Sharma∗ and Adam Goodman+
On January 11, 2005, the Ontario Court of Appeal issued a
judgment in a judicial review involving the United Mexican States
(Mexico) and Marvin Feldman Karpa (Feldman). Justice Robert
Armstrong of the Ontario Court of Appeal upheld Justice Dan Chilcott’s
decision of the Ontario Superior Court of Justice. Justice Armstrong
accepted Justice Chilcott’s finding that the NAFTA Tribunal’s US $1.6
million ruling against Mexico should be given a high degree of deference
and that Mexico had not shown any basis upon which to interfere with the
arbitration award. In so doing, as this article discusses, Justice Armstrong
added further reinforcement to the strength of the NAFTA Chapter 11
investor-state arbitration process.
I.
The Facts
The NAFTA arbitration concerned Mexico’s application of certain
tax laws to the export of tobacco products by Mexican-incorporated
Corporación de Exportaciones Mexicanas S.A. de C.V. (CEMSA), which
was owned and controlled by Marvin Feldman Karpa, a citizen of the
United States.
From 1990 to 1991, CEMSA exported cigarettes purchased from
high-volume retailers, like Wal-Mart and Sam’s Club, in Mexico for resale
in the United States. During that time, CEMSA enjoyed an excise tax
rebate on its cigarette exports. In 1991, Mexico passed legislation
eliminating tax rebates for cigarette exporters, which CEMSA and other
exporters successfully challenged in Mexico’s Supreme Court of Justice as
discriminatory and unconstitutional. In 1992, the legislation was amended
to extend rebates to cigarette exporters once again. CEMSA took
advantage of the rebate until 1993, when Mexican authorities denied it
certain rebates citing technical problems with CEMSA’s invoices.
Mexico took the position that CEMSA was required to produce
itemized invoices from its vendors that explicitly stated the amount of tax
included in the purchase price. Because the tax authorities did not require
vendors like Wal-Mart and Sam’s Club to separate their taxes in their
receipts—despite a Mexican law mandating them to do so—CEMSA
could not produce the invoices as required. This requirement made it